Bankruptcy

Company Payroll Tax Liability Not Dischargeable in Bankruptcy ? Might You be Liable?

By Jonathan Ginsberg, Atlanta Bankruptcy Attorney

It is well established law that “trust fund” withholding tax liability may not be dischargeable in bankruptcy.  What you may not know is that business owners or even senior employees who are not owners may be held personally responsible for payment of withholding tax debt, and such debt is not dischargeable in a personal bankruptcy filing.

North Carolina business law blogger Mack Sperling recently published a thorough review of the law relating to a corporate officer or other “responsible person’s” personal liability for payroll tax debt.  Mr. Sperling discusses the law in the 4th Judicial Circuit, but the principles set out in the 4th Circuit generally apply nationwide.

The applicable questions to be considered by a judge (in the 4th Circuit) to determine whether an individual bears responsibility for trust fund taxes include:

• did the employee serve as an officer or director of the company?
• did the employee control the company’s payroll?
• did the employee determine which of the company’s creditors to pay and when to pay them?
• did the employee participate in the corporations day to day management?
• did the employee have the ability to hire and fire employees?
• did the employee possess the power to write checks?

Let me stress, that the above factors currently apply in the 4th Circuit – the rules where you live may be slightly different and subject to specific interpretation by the courts where you live.  However, if you work for a company that is heading for financial trouble and you answer “yes” to some or all of the above questions, it is probably time to seek legal counsel.  If you are contemplating personal bankruptcy, please address potential trust fund liability with your attorney.

I have actually seen cases where the owner of a company offered an unexpected “promotion” to an employee that ended up putting that employee in a position where he could have been deemed a “responsible person” for trust fund tax purposes.  It seems counterintuitive that an action by your employer could leave you with thousands of dollars of personal and non-dischargeable tax liability but such is the case.

Thanks to my colleague Scott Riddle for writing about this trust fund issue in his Georgia Bankruptcy blog.

Full post as published by Bankruptcy Law Network on February 05, 2010 (boomark / email).